Thursday, the 4th November 1948

Shri B. Das: He has just spoken in Hindustani, thepurport of which is that he has moved his amendment. This iscontrary to the practice of this House. I think it is out oforder and it should not be allowed.

Mr. President: I think I had better allow the MaulanaSaheb to move the amendment. Then, you may take the point oforder.

Maulana Hasrat Mohani: *[I was telling the reason why Ido not regard this Constituent Assembly as a competent body.Firstly, because all over the world wherever a ConstituentAssembly has been set up, it has been done as an outcome ofrevolution. Revolution does not necessarily mean an armedrevolution. It only means that, when the prevailing systemof Government has come to an end and another is intended to be set up in its place, a Constituent Assembly has beeninvariably called to frame and pass a constitution in thelight of new conditions. If the previous form of Governmentwere to continue then there was no need of a ConstituentAssembly. Look at our new constitution drafted by Dr.Ambedkar. There is nothing new in it. He has mostly copiedout either the Government of India Act of 1935 or, asadmitted by himself, has drawn from the constitutions ofother countries. A bit from here and a bit from there-it isa Pandora's Box. This is what has been produced by ourfriend Dr. Ambedkar! My biggest complaint on this account isthat if for the purpose of drafting a constitution he had tocopy out the constitutions of other countries, then why didhe not embody the latest and the best constitution? How wasit that he looked up to the constitutions of Australia,Canada, America, and England, but the constitution of theSoviet Union did not catch his eye? I have jotted down allthe points he has made in his speech. This is not the timeto reply them in detail, but this much I can say that he hasretained all the bad points that he could lay his handsupon. He has observed that there should be no rigidity andlegalism, but has he at any place said that a Unitary Systemof Government should be established? At one place hementioned that he could not provide for the villagePanchayats. If he had kept the Soviet Constitution in view,there would have been no difficulty in his way. I claim itand I challenge him on that point. For example, he has saidthat unless there is a unitary type of Government and apowerful Centre, nothing can be done. Such talk is besidethe point. He does not know that it is so in the SovietConstitution. What he has done is to allocate some subjectsto Provinces, some to the Centre and some have been put inthe concurrent list. In the Soviet Constitution everyconstituent state has been made a permanent republic; and towin its confidence every component unit has been givencontrol over the defence, foreign relations andcommunications. What has been the result? He says that itwould be detrimental, but there the Soviet Government havegained the confidence of their component states. The resulthas been that all parts of the Soviet Union - considered fromthe point of view of population they are all Muslimrepublics - have helped their utmost in the last war. Peopleof Caucasia and of every war-ravaged region have stoodwholeheartedly by the Soviet Union. Cossacks and others whorendered help all belonged to the Union. Thus hisobservation is unjustified. He is not taking the people intohis confidence, and says that all should merge.]

Pandit Balkrishna Sharma: May I rise to a point oforder? The revered Maulana Sahib is discussing the merits of the Constitution whereas the proposal that is put forwardbefore us is that we must not consider this Constitution.The discussion of the merits of the Constitution cannot bebrought before the House when we are to consider only thequestion of postponement of the discussion.


* [] Translation of Hindustani speech.

Mr. President: I thought it would save time if you lefthim alone.

Maulana Hasrat Mohani: *[I repeat what I have alreadysaid, that the reason why this House is

not competent, isthat you have consulted all the constitutions of the world;but you have not cared to see the latest and the bestconstitutions. The second point arises, what was the basisof the election of our Constituent Assembly? It was oncommunal basis. Muslims had elected Muslims and Hindus hadvoted for the Hindus, but the States were not represented.What was the position at the time of the first meeting of the Constituent Assembly? On your own admission there werethree parties, namely, the Congress, the Muslim League andthe States; but up to that time the States had not come in.No member of the Muslim League had taken any part. Theresult has been that the constitution that has been framedhas been forged by one party alone. How can you enforce iton others? I mean to say that no reliance can be placed byus as the Constitution has been framed by one party alone.In the situation that has how arisen we also find the same,namely that there is only one party. It is like this: theMuslim League is finished, it has dissolved itself and allthe States have merged themselves in the Indian Union andnow only the Indian Government, namely one party, hasremained in the field. That is why we have to form politicalparties so that your difficulties may come to an end.]

Shri Satyanarayan Sinha (Bihar: General): *[Did youfind out any better solution?]

Maulana Hasrat Mohani: *[I am coming to that. Dr.Ambedkar has just said that the majority party should beconsiderate towards the Minority party. I say: we do notwant them. You have provided in the constitution that 14 percent of the seats should be reserved for the Muslims. Youstill consider yourself 86 per cent and Muslims to be 14 percent. So long as you have this communalism, nothing can bedone. Why do you say that Muslims are in a Minority. So longas you depict them in communal colours Muslims shall remaina Minority. When we come as members of a political party oras members of the Independent Communist party or asSocialists and then form a coalition party, then as a wholethey will be arrayed against the rest.

You say that a long time has elapsed that many thingshave happened and that you have worked so hard. Mr.President, I would recall that when Pandit Jawahar Lal Nehruhad presented the Draft Constitution, I had then raised anobjection and he had advised me to leave alone a primarymatter. I had thereupon pointed out to him that it would beabsurd to leave aside a point which is to be settled first.I had also pointed out that by doing so he would not betaking any strong and firm stand but would be stuffingirrelevant matter in all directions. I had also enquiredwhat he would do if questions were raised on these issues,if without taking any decision, he started framing theconstitution. It is a futility; we should see what type ofConstitution is required. We want to make a picture, but ifthat picture is not painted correctly, then it cannot betermed a picture. You will say that you have worked hard andthat quite a long time has elapsed. My answer would be thatthere is no difficulty about it, neither was there any risk.I had protested at that time and I was glad that theHonourable President had stated that the point would beconsidered and it was on that understanding that we haddiscussed the resolution. You know that the same thing hashappened in Pakistan as well. Mr. Jinnah had said that solong as the Constituent Assembly was not elected, theconstitution could not be passed. This is the reason why Iam telling you that so long as the Constituent Assembly isnot elected on non-communal basis, you have no right to geta constitution passed by this Constituent Assembly. Nomatter receives any consideration from you, because you areinflated with the idea that you are in a majority and thatwhatever you like will be passed. Do not


* [] Translation of Hindustani speech.

imagine that no blame will come upon you. I am alone and Iam saying all I can say. You may not agree. In reality youare doing all that the British Government had been doing.After sometime they

used to give us pensions and used to askus to stay at home. But why should we do so?

I would like to ask you what you are doing inHyderabad. You say that a Constituent Assembly will be setup which would frame a constitution. You have accepted thisprinciple for Hyderabad. Why don't you do it here? Obviouslyall this is being done on communal lines in which truth andjustice have no place.

If he says that he cannot do that, he has no power toelect a new Constituent Assembly on the basis of jointelectorate and that would be done after the constitution hasbeen framed, then I repeat what you have said, that`legalism' and `rigidity' should be cast aside. I ask himwhether he can set up a Constituent Assembly in Hyderabadwithout the Nizam's fireman. But here we set up anelectorate for the Constituent Assembly as we felt the needfor it; so it is incorrect to say that we can not do it."Where there is a will, there is a way." If you are inearnest to be just to the country and if you want to treatevery one equally, then I give you a warning that yourendeavour to assimilate all into one whole, to build aparamount Indian power, will bring disaster. The latestexample is that of Aurangazeb the Emperor. After conqueringthe whole of India he annexed the two Southern States ofBijapur and Golcanda with the intention of founding aunitary Moghul Empire. What was the result? They sayAurangazeb lost his kingdom because of his bigotry but I sayit was lost because of his imperialistic ideas. If he hadnot done that, he would not have lost a kingdom. Do notthink it is easy to form a single unitary Government bycoercing each and all into your fold. That can not last. Youshould hold fresh elections on non-communal basis, on thebasis of joint electorates, and then whatever constitutionyou frame will be acceptable to us. We regard theconstitution framed by you worthy of being consigned to thewaste paper basket.]

Shri B. Das: I wish to point out that under Rule 31sub-clause (2) the motion for adjournment on the motionmoved by the Honourable Dr. B. R. Ambedkar for theconsideration of Draft Constitution of India should not havebeen allowed by the Chair.

Mr. President: I have taken this under Rule 25, Clause(5), sub-clause (b) as a motion for adjournment ofconsideration of a motion which is under discussion.

Shri B. Das: But he is wanting a fresh election to takeplace first in the country. That is a negation of the wholeidea.

Mr. President: I have liberally construed the rule forthe Honourable Member and I have taken it, as I have said,under Rule 25, Clause (5), sub-clause (b).

Begum Aizaz Rasul (United Provinces: Muslim): Sir,before we adjourn for the day, may I know how many days theChair proposes to allow for the general discussion on Dr.Ambedkar's motion?

Mr. President: As at present advised, it is hoped toconclude the discussion tomorrow. I will limit the time ofeach speaker and if I find that there is a considerableopinion in favour of further discussion, more time may begiven.

The Constituent Assembly then adjourned till Ten of theClock on Friday the 5th November 1948.


* [] Translation of Hindustani speech.




New Delhi, the 21st Octo ber 1947.






We, the members of the Committee appointed by you inaccordance with the motion adopted by the ConstituentAssembly on the 30th July, 1947, for the purpose ofrecommending constitutional changes in the five Centrallyadministered areas, viz., Panth Piploda, Andaman and NicobarIslands, Coorg, Ajmer-Merwara and Delhi, submit this ourreport and the annexure thereto. We have adopted broadly theprinciples of responsible government as the basis of theconstitution for the three last mentioned provinces. Wehave, however, made some modifications in the provisionsadopted by the Assembly in respect of the Major Provinces.Before formulating our proposals we fully considered theposition of these

provinces with respect to their geography,financial condition and the working of the existing systemof government in these areas.

2. Panth Piploda is a small tract of territoryconsisting of only 10 1/2 villages situated in Malwa in theCentral India Agency. In view of its small size and isolatedposition we have recommended that it should form part of theprovince of Ajmer-Merwara. This step was also suggested bysome influential citizens of Panth Piploda. As regards thegroup of islands in the Bay of Bengal known as the Andamanand Nicobar Islands which have ceased to be penalsettlements, we recommend that they should continue to beadministered by the Government of India as at present withsuch adjustments in their administrative machinery as may bedeemed necessary.

3. Before recommending any constitutional changes forthe three Chief Commissioners' Provinces of Coorg, Ajmer-Merwara and Delhi which we propose to designate asLieutenant Governors' Provinces, we took into account thefollowing considerations: -

(a) that the Centre must have a special responsibility for the good government and the financial solvency of these provinces:

(b) that on account of the smallness of these areas and the scantiness of their resources, the need for Central assistance will continue for pulling up the standard of their administration to the level in the major provinces.

Among the important decision taken by us are: -

(1) Each of these three provinces should henceforth function under a Lieutenant Governor to be appointed by the President of the Indian Federation.

(2) Each of these provinces should normally be administered by a Council of Ministers responsible to the legislature as in other provinces, but any difference on an important matter arising between the Lieutenant Governor and the Ministry should be referred to the President of the Federation for final decision.

(3) Each of these provinces should have an elected legislature which should function like other provincial legislatures except that -

(a) the Federal Legislature will in the case of these provinces, have concurrent power of legislation even in respect of the subjects included in the Provincial Legislative List;

(b) all laws passed by the provincial legislature shall require the assent of the President of the Federation;

(c) the budget of the province after being voted by the provincial legislature shall require the approval of the President of the Federation before it becomes operative.

4. We are fully alive to the circumstances which led tothe formation of the Delhi province in 1912. We alsorecognize the special importance of Delhi as the Capital of the Federation. We are, however, of the opinion that thepeople of the province which contains the Metropolis ofIndia should not be deprived of the right of self-governmentenjoyed by the rest of their country-men living in thesmallest of villages. We have, accordingly, placed the DelhiProvince on a par with Ajmer-Merwara and Coorge and haverecommended responsible Government subject to thelimitations already indicated. Our detailed recommendationsare given in the annexure.

Your sincerely,








Members of the Committee.



Delhi, Ajmer-Merwara including Panth Piploda, Coorg andsuch other provinces as may be so designated shall beLieutenant Governors' Provinces.

The Provincial Executive

2. In each Province there shall be a LieutenantGovernor who shall be appointed by the President of theFederation.

3. The provisions of the Constitution Act relating tothe term of office, qualification for appointment,eligibility for re-appointment, conditions of office,declaration before entering office by the Governor shall asfar as possible be applicable in the case of the LieutenantGovernor. He may be removed from office by the President ongrounds upon which a Governor may be impeached.

4. (i)

The executive authority of the Province shall bevested in the Lieutenant Governor and may be exercised byhim either directly or through persons acting under hisauthority.

(ii) The power to suspend, remit or to commute thesentence of any person convicted of any offence shall bevested in the Lieutenant Governor as in the case of majorprovinces.

(iii) Nothing in this section shall prevent thePresident of the Federation or the Provincial Legislaturefrom delegating functions to subordinate authorities.

Administration of Provincial Affairs

5. (i) There shall be a Council of Ministers with theChief Minister at the head to aid and advise the LieutenantGovernor in the exercise of his functions except in so faras he is by or under this Constitution required to exercisehis functions or any of them in his discretion. The numberof ministers shall not exceed three except with the approvalof the President of the Federation.

(ii) In case of difference of opinion between theLieutenant Governor and his ministers on any issue which heconsiders important, he may refer the matter to thePresident of the Federation, whose decision shall be finaland binding upon the Province.

6. The provisions of the Constitution Act relating tothe appointment, dismissal and with respect to thedetermination of the salaries of the ministers in theGovernors' Provinces shall, as far as possible, beapplicable in the case of Lieutenant Governors' Provinces.


7. There shall for each of the Lieutenant Governor'sProvince be a Legislature, consisting of a single Chamber to be known as the Legislative Assembly. It shall be composedof members chosen by election.

8. The term of office of the elected members of theAssembly, the basis of franchise and other generalprovisions shall be on the lines as provided in theConstitution Act for Governors' Provinces except that therepresentation of the different territorial constituenciesin the Assembly shall be on a scale of not more than onerepresentative for every 5,000 persons subject to a maximumof 33 for Coorg, 15,000 subject to a maximum of 40 in thecase of Ajmer-Merwara including Panth Piploda and 20,000subject to a maximum of 50 in the case of Delhi.

9. The Provincial Assembly shall not have the power tomake laws for federal subjects; and the subjects included inboth the provincial and concurrent lists in the newconstitution, will be treated as concurrent in respect of these minor provinces. Laws made by the federal legislaturefor these provinces in respect of any of these subjectsshall prevail over laws passed by the Provincial Assembly inso far as the latter are inconsistent with the Federal laws.

10. Laws passed by the Provincial Assembly shallrequire the assent of the President of the Federation.

11. The provisions of the Constitution Act relating toprorogation and dissolution of the legislature, the right of the Governor to address and send messages, election ofmembers as Officers of the legislature and fixation of theirsalaries in Governor's Provinces shall apply mutatismutandis in the case of Lieutenant Governors' Provinces.

12. The Provisions of the Constitution Act relating tothe making of declaration by members, vacation of seats,disqualifications of members, their privileges andimmunities, salaries and allowances, in the ProvincialLegislatures shall be as far as possible be applicable inthe Lieutenant Governors' Provinces.

13. The provisions of the Constitution Act relating tolanguage to be used in the Provincial Legislature shall asfar as possible be applicable in the case of theseProvinces.

Administrative Breakdown

14. If at any time the President of the Federation issatisfied that the government of the Province cannot becarried on in accordance with these provisions, he shouldhave power to supersede these arrangements, take theadministration into his own hands and make such otherprovision for conducting it as he may consider necessary.The exercise of this power will be subject to the usualprovisions relating to report to and control by the

FederalLegislature in the case of emergencies in a Governor'sProvince.


15. (i) In the case of Coorg, the powers of a HighCourt shall be exercised by the Madras High Court.

(ii) For Delhi and Ajmer-Merwara there shall be a HighCourt established in Delhi having original as well asappellate jurisdiction over both the provinces. Theconstitution of this High Court, the appointment of judgesand their salaries, its jurisdiction and administrativefunctions shall be governed by the provisions of theConstitution Act applicable to the High Courts.

Provincial Services

16. (i) For higher appointments provision shall be madein the recruitment of All India Administrative Services formeeting the requirements of these three provinces.

(ii) Provision shall be made for transfers inter se ofservice personnel recruited in the above manner in thesethree provinces.

Representation in the Federal Legislature

17. Notwithstanding anything to the contrary in theUnion Constitution regarding the basis of representation forthe Houses of Federal Legislature, each of these three MinorProvinces should be treated as a unit of the Federation forpurposes of representation in the two Houses of the FederalLegislature.


18. (i) Andaman and Nicobar Islands and such otherareas as may be so designated shall be the ChiefCommissioners' Provinces.

(ii) The Andaman and Nicobar Islands shall continue to be administered as at present with such adjustments in theadministrative machinery as may be deemed necessary.

Additional Note by Shri Mukat Behari Lal Bhargava and Shri C. M. Poonacha, to the Chief Commissioners' Provinces Constitution Committee Report.

We, the members representing Ajmer-Merwara and Coorghaving signed the report find it necessary to append thisadditional note regarding the future of these two provinces.

The special problems arising out of the smallness of area, geographical position, scantiness of resourcesattended with, what may be called administrativedifficulties of many a complex nature may, at no distantfuture, necessitate the joining of each of these areas witha contiguous unit. Therefore, we feel that a specificprovision should be made in this chapter of the constitutionto make possible such a union after ascertaining the wishesof the people of these areas. No doubt, our attention wasdrawn to clause 3 of the Union Constitution CommitteeReport, which is yet to be adopted by the ConstituentAssembly, wherein certain provisions relating to thecreation of a province, altering the boundaries of aprovince, etc., are embodied. But after careful examinationwe feel that the proposed clause 3 of the Union ConstitutionCommittee Report is of a very restrictive nature and doesnot in specific terms contemplate the inclusion of an IndianProvince of areas with a State or Group of States. Takinginto account the situation of Ajmer-Merwara which issurrounded on all sides by Rajputana States such a clausewould perpetually leave Ajmer-Merwara in isolation eventhough the people of Ajmer-Merwara may at any time decideagainst it. Accordingly we press upon the ConstituentAssembly the urgency of incorporating a suitable provisionin this chapter of the Constitution so as to make itpossible for each of these areas to join a contiguous unit.

No. CA/103/Cons/47



Delhi, the 5th December 1947.





Expert Committee on Financial Provisions


I have the honour to forward herewith the Report of theExpert Committee on Financial Provisions of the UnionConstitution for submission to the Hon'ble the President.

I have the honour to be,


Your most obedient servant,




Terms of Reference


We were appointed by the President of the ConstituentAssembly to examine and report on the Financial Provisionsof the Constitution Act with the following terms ofreference: -

I. To examine, with the aid of the memoranda on thedistribution of revenue between the Centre and the Provincessent by the Government of India and the Provinces, theexisting provisions relating to finance and borrowing powersin the Government of India Act, 1935, and their workingduring the last ten years and to make recommendations as tothe entries in the lists and sections to be embodied in thenew Constitution.

The following points shall, in particular, be kept inview in making the recommendations: -

(a) How are taxes to be allocated between the Centre and the Units as regards legislation, levy and collection?

(b) Which are the Federal taxes -

(i) whose net proceeds are to be retained entirely by the Centre;

(ii) whose net proceeds are to be entirely made over to Units;

(iii) whose net proceeds are to be shared between the Centre and the Units?

(c) On what principles the taxes mentioned in (b) (iii) are to be shared between the Centre and the Units?

(d) What is to be the machinery for determining the shares: e.g., whether a Financial Commission should be appointed immediately after the enactment of the Constitution to report on the principles of sharing and their application to be brought into effect when the Constitution comes into force; and whether the same or a similar Commission should review these principles and their concrete application periodically, say, once in five years?

II. What should be the principles on which Federalgrants should be made to the Units in future? What should bethe machinery for the determination of such grants: couldthe same Financial Commission as is referred to in I(d)above act as the machinery for this purpose also, or shouldit be a different one?

III. How could the Indian States be fitted into thisgeneral system as far as possible on the same terms asProvinces? Should a time lag be provided for their being sofitted in?

IV. On the assumption of financial responsibility forDefence, Foreign Affairs and Communications on behalf of theIndian States under arrangements for accession to theFederation, what special financial arrangements, if any, arenecessary between the acceding States and the Federation?

V. Should the existing rights of the Indian States asto Federal taxes now levied by them be acquired on paymentof compensation?

VI. How far is it feasible, on the centralization of all customs levied at the Federal frontiers, to permitIndian States affected by such centralization to retain suchportion of the customs so levied at their frontiers as mightbe attri- ments between the Centre and certain important IndianStates as regards maritime customs, excises etc. may be ofvalue in this connection.]

VII. Some Provinces have claimed a larger percentage of the income-tax to be made over to them than under theexisting system. Does this claim merit consideration; if so,to what extent?

VIII. A suggestion has been made that the Centre shouldbe allocated only the excises on specified commodities, therest of the field of excise being left to the Provinces totap according to their needs. Would this be possible withoutany material detriment to Federal revenue?

IX. On the basis that the residuary powers are vestedin the Centre in the new Constitution so far as theProvinces are concerned, and in the States so far as theStates are concerned, is it necessary that any additionalspecific taxes should be entered in the Provincial List, andif so, what?

X. Is it necessary to make any modifications in theexisting provisions as regards procedure in financialmatters contained in Sections 33 to 37 and 78 to 83 of theGovernment of India Act, 1935?

XI. A large number of Indian States at present derivesubstantial revenues from land customs levied at thefrontiers between their limits and those of neighbouringStates or Provinces. One of the fundamental rights alreadyadopted by the Constituent Assembly is to remove allinternal barriers in regard to trade between Unit and Unit.Could these land customs be done away with eitherimmediately or over a

period of years, and if so, should anyprejudice caused thereby to the finances of particularStates be compensated and in what manner?

[The Committee should kindly indicate clearly which ofits recommendations should go into the body of theConstitution and which should be provided for by Federallaw.]

Prefatory Remarks

2. We began our work on the 17th November and have beensitting continuously. We have received memoranda from thevarious Provincial Governments setting out their claims forlarger resources as well as their points of view inconnection therewith. We have also received a memorandumfrom the Ministry of Finance of the Central Governmentgiving a picture of the financial position of the Centre inthe near future. The Secretariat of the Constituent Assemblyhas collected for us information on various matters relatingto the States, and also helpful information regarding otherFederations. It has also prepared a draft of the sectionswhich come within our terms of reference; and this hasconsiderably helped us in our work. We are indebted for allthese memoranda, information and drafts. We are alsoindebted to some of the Provincial authorities who appearedbefore us in person and discussed with us informally thequestion arising out of the memoranda presented by theirGovernments. We availed ourselves also of the specialisedknowledge and experience of not only some of the officialsof the Central Secretariat, but of some members of theConstituent Assembly and others who have unique knowledge ofsome of the problems under our consideration. All ourdiscussions, however, were free and informal; and we didnot, therefore, record any evidence, apart from thememoranda placed before us.

3. In particular, the other two of us would like toplace on record our grateful appreciation of the assistancewe have received from our colleague and Secretary Mr.Rangachari, who amidst his exacting, multifarious duties,including thepreparation of the interim budget, not only found timeregularly to attend our meetings, but also placed his wideknowledge and experience at our disposal, and arranged tosecure at short notice most of the available informationrequired by us. We should also like to thank Mr. B. DasGupta of the West Bengal Government Secretariat for theintelligent and extremely well informed assistance he gaveus. We are also indebted to Mr. Mukerjee, Joint Secretary of the Constituent Assembly, for his help throughout oursittings and in particular for putting our recommendationsin the shape of draft amendments to the Constitution.

4. Our terms of reference may be divided broadly intothe four following groups:

(1) Relations between the Centre and the Units, and between the Units inter se;

(2) Financial procedure, i.e. relating to the budget, expenditure and money Bills;

(3) Borrowing powers of Units; and

(4) Relations of the Union with the States.

We have accordingly, for convenience, regrouped ourterms of reference as follows:

(1) I, VII, VIII, IX, II

(2) X

(3) I

(4) III, IV, V, VI, XI

and discussed them, as far as possible, in the above order.

Brief History of Financial Relations

5. Before dealing with the working of the financialarrangements in the Government of India Act, 1935, it isnecessary to give a brief account of the earlierarrangements so that we can have a correct picture of theproblems before us.

6. The period before the passing of the Government ofIndia Act, 1935, falls into two well-defined parts, namely,the period ending with the 31st March, 1921, i.e., beforethe operation of the Government of India Act, 1919, and theperiod covered by that Act.

7. The process of financial development in this countryhas been one of evolution from a unitary to a quasi-federaltype. The Government of India started as a completelyunitary Government in entire control of the revenues of thecountry with the Provincial Governments depending on theCentral Government for all their requirements. In theearlier years, Provincial Governments were given fixedgrants for meeting the expenditure on specific

services, andthe first step in making specific sources available to themwas taken when the Provincial Governments were given thewhole or part of certain heads of revenue like Forest,Excise, Licence Fees (later to develop into Income-tax),Stamps, Registration, Provincial Rates, Law and Justice,Public Works, Education, etc. The funds released by thisallocation were not adequate for the requirements of theProvinces and had to be supplemented, mainly by sharing withthem in varying proportions the main source of Centralrevenue, namely, Land Revenue, and partly by making to themadditional cash assignments. In 1904, the settlements withthe Provinces were made quasi-permanent, thereby making theProvinces less dependent on the fluctuating grants from theCentre. This method of financing the Provinces was examinedmore than once and retained as the best suited to the thencircumstances.

8. The Government of India Act, 1919, which, amongother things, aimed a giving a reasonable measure of autonomy to the Provinces as the first step in the processof self-government, made the first clear-cut allocation ofresources between the Centre and the Provinces withouthaving any divided heads between them. Under this Act,certain specific heads were given wholly to the Provincesand the remaining sources were retained by the Centre. Thusamong the principal heads of revenue, Land Revenue, Exciseand Stamps were given to the Provinces, while the Centreretained Customs, Income-tax, Salt and Opium. Of the threegreat Commercial departments of Government, Railways andPosts and Telegraphs were retained by the Centre, whileirrigation was handed over to the Provinces.

9. This allocation of resources between the Centre andthe Units, particularly the assignment of the whole of LandRevenue to the Provinces, left the Central budget in asubstantial deficit; and in the earlier years of thisscheme, the Centre had to depend on the Provinces forcontributions for balancing its budget. These contributionswere fixed by what is commonly known as the Meston Award,and were designed to produce for the Centre an estimatedshortfall of Rs. 9.8 crores resulting from the rearrangementof resources between the Centre and the Provinces. Thecontributions ranged from Rs. 348 lakhs from Madras to Rs.15 lakhs from Assam, while one Province, namely, Bihar andOrissa, had to make no contribution at all. It isunnecessary for the present purpose to describe in detailthe method by which these contributions were fixed. It isenough to mention that they became a source of constantfriction between the Centre and the Provinces; and whensubstantial Provincial deficits occurred, an unceasingclamor developed for their withdrawal. Between 1925 and 1928these contributions were partially remitted and they werecompletely extinguished in 1929.

10. The experience of the years under the 1919 Actclearly showed that the sources of revenue allocated to theProvinces were inelastic, and were insufficient to meet theincreasing requirements of the Provinces for their expandingneeds for nation building services such as Education.Medical Relief, Public Health etc., which fell almost whollyin the Provincial field. It was clear that some additionalrevenue heads had to be released to the Provinces; and whilethe Government of Inida Act. 1935 did not make any radicalchange in the allocation of heads between the Centre and theUnits, it revived in a somewhat modified form the earlierprinciple of dividing the proceeds of certain Central heads,the two heads concerned being Customs and Taxes on Income.The Act also provided for the grant of fixed subventions tosome of the smaller Provinces, and gave the Centre power toraise Excise and Export duties for distribution among theProvinces and federating States. After an enquiry into therelative needs of the Centre and the Provinces by Sir OttoNiemeyer, the Provincial shares in the divided heads ofCentral revenue and the subventions to some of the Provinceswere fixed by an Order-in-Council, which, subject to amodification during the war, continued till 15th August,1947.

Present Constitutional Position

11. Under the Government of India Act. 1935, which isthe starting point of our enquiry, the taxing jurisdictionsof the Central and Provincial Legislatures are entirelyseparate. But, while the Provinces retain the whole of thenet proceeds of all taxes levied by them, the CentralGovernment has to give away either in part or in whole thenet proceeds of some of the taxes levied by it.

12. The taxes, the net proceeds of which are to begiven away wholly to the Provinces, if levied, are -

(1) Federal Estate and Succession duties.

(2) Federal Stamp duties,

(3) Terminal Taxes on goods and passengers carried by Railway or Air

(4) Taxes on Railway fares and freights.

The Centre can levy a surcharge on those taxes entirelyfor its own purposes. None of these taxes has in fact beenlevied, except that the Federal Stamp duties continue to belevied under the old laws, the duties however beingcollected and retained by the Provinces.

13. The Federal Taxes, the net proceeds of which are to be shared with the Provinces, fall into two groups: -

(1) taxes, the sharing of the net proceeds of which has been made obligatory by the Constitution viz., income-tax and jute export duty.

(2) taxes, the sharing of the net proceeds of which has been left to be determined by the Federal Legislature viz., Central Excises including duty on salt, and export duties except on jute and jute products. The Central Legislature has levied certain taxes under these heads, but has not provided for giving any share to the Provinces.

14. Besides providing for giving away the net proceedsof taxes in whole or in part to the Provinces, theConstitution also provides for fixed grants-in-aid to someProvinces.

15. There is also a general provision for giving grantsto Provinces at the discretion. of Central Government eitherfor general or specific purposes.

16. Two tables showing the Constitutional position inrespect of the revenues of the Federal and ProvincialGovernments respectively under the Government of India Act,1935, will be found in Appendix I. We are indebted to Mr.Ayyangar's commentary on the Government of India Act, 1935,for these tables.

Review of Finances of Provinces and the Centre

17. Two tables giving the financial position of theProvinces and the Centre during the year 1937-38 to 1946-47are set out in Appendix II. In considering the working of the existing arrangements during the last decade, the mostimportant point to note is that war broke out soon after theGovernment of India Act, 1935, came into operation.

18. During the war, all Provinces except Bengal andAssam had surplus budgets. Revenue receipts increasedseveral times, mainly on account of wartime conditions andalso because the Provinces levied a number of new taxes andincreased the rates of existing ones; there were remarkableincreases in receipts under Provincial, i.e., Liquor andDrugs, Excises, and in the Provincial share of Income-tax.Most Provinces were under Section 93 administration. Alldevelopment work was stopped. The Provinces are now facedwith a heavy programme of expenditure without anycorresponding increase in revenue. On the contrary, evenapart from voluntary abandonment of revenue as in the caseof Liquor Excises, the revenue is likely to go down muchbelow wartime levels. Land revenue, both in the permanentlyand temporarily settled provinces, is not likely to expand.State purchases of zamindaries will not bring any return foryears to come. In ryotwari Provinces, remissions are likelyto be more liberal than before, and there is thus littleprospect of an increase in land revenue. Receipts fromstamps and registration fees are not likely to increasemuch, while forest revenue will perhaps dwindle on accountof large scale felling during the war. Receipts from salestax, entertainment tax may not fall, thought they will bebelow the war-time peak for some time to come.

19. During the war and after, most of the ProvincialGovernments have practically exhausted the entire field oftaxation reserved for

them. Moreover, Provincial Governmentshave to share the Provincial field with Local Bodies, and onthat account too, need adequate resources. A substantialtransfer of revenues from the Center to the Provinces,therefore, seems inevitable, if essential and overdueprogrammes of social service and economic development haveto be undertaken.

20. At this stage, we would refer to the adoption, bymost Provincial Governments, of a prohibitionist policy; andof the inevitable loss of substantial revenue by all of them. Obviously, it is for the provinces to find alternativeprovincial resources from which to recoup the loss; and incase, it any case, it would not be practicable for provincesto expect sufficient assistance from the Center for thispurpose, at any rate for many years. The point that we wishto emphasise is that it will be for the provincialGovernment to balance the urgency of schemes of developmentagainst the advisability of social reforms like prohibition,and that in any case, they must not embark on schemes,whether of reform or development, depending merely on thepossibility of obtaining assistance automatically from theCentre.

21. To turn now to the Centre, it has been working ondeficit budgets. The large surpluses that were expectedsometime ago have not been, and are not likely to berealised, mainly because of the food shortage, the refugeeproblem and other causes arising out of the partition of thecountry, particularly, continued heavy expenditure onDefence. These are, however, temporary problems, and weconsider that the financial position of the Centre isessentially sound. As these temporary problems are solved,the budgetary position of the Centre will necessarily getbetter. There is scope for improvement in the administrationof Central taxes, and particularly of taxes on income. Inrespect of taxes on income, it should be possible for theCentre not only to collect more in future in the ordinarycourse every year, but to secure for the exchequer, bylegislative changes, if necessary, the large sums that arebelieved to have been successfully kept back from theGovernment in recent years. We do not, however, expect anyappreciable change under Customs and Excise; and we do notexpect Railway contributions on anything like the scaleduring the war. Even after the temporary problems referredto above have been solved, expenditure on Defence andForeign Affairs would still be substantial. The DefenceServices will probably be reorganised and re-equipped, andit is not possible to foresee what would be the scale ofexpenditure for properly equipped defence services even on apeace-time basis. There is little prospect on the other handof reduction in the service of the national debt but thereis, however, scope for reduction in the existing civilexpenditure.

22. The problem before us is how to transfer from theCentre to the provinces, sufficient amount which, while notplacing too great a strain on the Centre, would provideadequate resources for the inauguration of useful schemes ofwelfare and development by the Provinces. While the Centre,on its present basis, may not be in a position to part withsubstantial sums, we fell that with the resolution of itstemporary difficulties and improvement in its taxadministration, together with the levy and collection oftaxes evaded in the past, it can with no serious risk to itsown budget part with sizable sums every year. We aresuggesting later in detail how these sums should beregulated. We have already referred to the need forProvinces having clear priorities as between contendingdemands for money, and we have no doubt that the Provinceswill in the earlier years utilise the additional resourcesnow placed at their disposal by concentrating on schemesthat would add to the productive capacity of the country andconsequently the income of the people and thus enable theprovinces to embark on further schemes of reform anddevelopment.

23. Every Province has drawn pointed attention to theurgency of its programmes of social service and economicdevelopment and to the limited nature of its own

resources,both existing and potential, and all of them have asked forsubstantial transfer of revenues from the Central sources. Asummary of the detailed suggestions made by them, which veryconsiderably, is set out in Appendix III.

24. On the question of apportionment of income-taxamong Provinces also, the provinces differ widely in theirviews. Bombay and West Bengal support the basis ofcollection or residence, the United Provinces that ofpopulation, and Bihar a combined basis of population andorigin (place of accrual); Orissa and Assam want weightagefor backwardness. East Punjab, while suggesting no basis,wants her deficit of Rs. 3 crores somehow to be met.

25. In the case of excise taxes, the bases suggestedare production, collection, consumption and population,while Assam suggests some weightage for its low level ofrevenue and expenditure. Assam has further pressed forspecial treatment of excises collected on wasting assets,e.g., the petroleum raised in Assam Assam also wants a shareof the export duty on tea.

General Observations

26. Before we proceed further we would make a fewgeneral observations.

India has federal form of Government, and everyfederation is based on a division of authority and involvesa certain amount of compromise. In this country, federationhas been the result of gradual devolution of authority. Ithas not come into existence through agreements amongsovereign States as in some other federations.

27. What we have to do is to distribute the totalavailable resources among Federal and Provincial Governmentsin adequate relation to the functions imposed on each; so,however, that the arrangements are not only equitable inthemselves and in the interests of the country as a wholebut are also administratively feasible. We have also toensure that there is not too violent a departure from thestatus quo, and also to see that while we have as muchuniformity as possible, weak Units are helped at least tomaintain certain minimum standards of services.

28. The basic functions of a Federal Government areDefence, Foreign Affairs and the service of the bulk of thenational debt, and they are all expensive functions,particularly in the light of the limited resources of thecountry. The head "Communications" would ordinarily at leastpay for itself. The Federal Government may also have toassume leadership in the co-ordination and development ofresearch and higher technical education. Normally, however,apart from war or large scale internal disorder, theexpenditure of the Centre should be comparatively stable.The needs of the Provinces are in contrast, almostunlimited, particularly in relation to welfare services andgeneral development. If these services, on which theimprovement of human well-being and increase of thecountry's productive capacity so much depend, are to beproperly planned and executed, it is necessary to place atthe disposal of Provincial Governments adequate resources of their own, without their having to depend on the variablemunificence or affluence of the Centre. The Provinces must,therefore, have as many independent sources of revenue aspossible. On the other hand, it is not practicable toaugment their revenues to any considerable extent by addingmore subjects to the Provincial Legislative List, withoutsimultaneously up-setting the equilibrium of the Centre. Wecannot, therefore, avoid divided heads; and what we have toaim at is to have only a few divided heads, wellbalanced and high-yielding, and to arrange that the sharesof the Centre and the Provinces in these heads are adjustedautomatically without friction, or mutual interference.

29. In this country the lack of sufficient economic andfinancial statistics and other similar data is a greathandicap. Therefore, the allocation of resources has to bemade largely on the basis of a broad judgment, at any rateuntil the necessary data become available. We attach greatimportance to the collection of these statistics and toconnected research, and trust that the Government will makethe necessary arrangements without delay. In the

meantime wehave made our recommendations on the best judgment we couldgive to the exiguous data available.

Lists of taxes for the Centre and the Units

30. We recommend no major change in the list of taxesin the Federal Legislative List as recommended by the UnionPowers Committee. We however, recommended the substitutionof the limit of Rs. 250 for Rs. 50 in clause 200 of theDraft Constitution relating to taxes on professions, trades,callings and employments. We observe from the Draft Constitution that it has been proposed to transfer to theFederal Legislative List stamp duty on transfer of sharesand debentures, but we presume that the duties will continueto accrue to the Provinces. In view of the far-reachingeffects on public credit and finance of Stock Exchangetransactions, we consider that the Centre should have thepower to legislate for the regulation of such transactions.If such regulation involves the levy of taxes, we recommendthat such taxes should be retained by the Centre except thatif the taxes take the form of mere duties on transfers ofshares and debentures, the Provinces should have theseduties just like other Stamp duties. We accordinglyrecommend the entry in the Federal Legislative List of a newitem "Stock Exchanges and futures market and taxes otherthan Stamp duties on transactions in them".

31. In the list of taxes in the Provincial LegislativeList, we recommend the following changes: -

(1) In entry 43, the words "hearths and windows" may bedeleted. Such taxes are not likely to be levied. In anycase, they would be covered by the word "buildings".

(2) In entry 53, the word "cesses" should, we think, bereplaced by the word "taxes".

(3) Similarly, in entry 56, we would substitute theword "taxes" for the word "dues".

(4) In entry 50, we would make the following changes: -

(a) for the word "sale", we would substitute "sale, turnover or purchase", in order to avoid doubt.

(b) We would also add words such as "including taxes in lieu thereof on the use or consumption within the Province, of goods liable to taxes by the Province on sale, turnover or purchase". This addition is suggested in order to prevent avoidance by importing for personal use from outside the province.

32. One of the Provincial Memoranda has suggested thatthe entry "State Lotteries" should be transferred to theProvincial List, but, as we do not wish to encourage StateLotteries, we should prefer the subject to remain Centralwhere, too, we hope, it will not be used.

Shares in certain taxes

33. We have no new items to suggest for insertion inthe Provincial Legislative List.

34. The Federal Government will levy and collect allthe taxes in the Federal Legislative List. But, according toour recommendations in the following paragraphs the Centrewill retain the whole of the net proceeds of the followingtaxes only, viz.: -

(1) Duties of customs, including export duties.

(2) Taxes on capital value of assets and taxes on the capital of Companies.

(3) Taxes on Railway fares and freights.

35. At present, the Central Government shares the netproceeds of the Jute Export duties with the jute-growingProvinces and has to hand over to the Provinces the whole of the net proceeds of taxes on railway fares and freights, iflevied. As regards the latter, we recommend that, if suchtaxes are to be levied at all, they should be whollyCentral, for, we cannot see any difference in substancebetween such taxes and a straight addition to fares andfreights. As regards the former we are of the opinion thatan export duties are capable of very limited application andhave to be levied with great caution, they are unsuitablefor sharing with the Provinces.

36. It is necessary, however, to compensate theProvinces concerned for the loss of this item of revenue andwe recommend that, for a period of 10 years or till theexport duties on jute and jute products are abolished,whichever may be earlier, fixed sums as set out below bepaid to these Governments as compensation every year.



West Bengal

. . . . 100 lakhs.

Assam . . . . . . 15 ,,

Bihar . . . . . . 17 ,,

Orissa. . . . . . 3 ,,

In arriving at these figures which we have based on thefigures of pre-war years, we have taken all relevantcircumstances into account, and in particular theconcentration of manufacture in West Bengal. If at the endof ten years, which we think should be sufficient to enablethe Provinces to develop their resources adequately, theProvinces still need assistance in order to make up for thisloss of revenue, it would no doubt be open to them to seekgrants-in-aid from the Centre, which would be considered ontheir merits in the usual course by the Finance Commission.

37. Of the remaining Federal Taxes, we recommend thatthe net proceeds should be wholly or partly given away tothe Provinces as indicated below:

38. Under the present arrangement the Provinces receive50 per cent of the net proceeds of income-tax, except whatis attributable to Chief Commissioner, Provinces and taxeson federal emoluments. The net proceeds of the CorporationTax are also excluded for the purpose of the sharing.Subject to what we have said in paragraph 49 regarduing taxon agricultural income, we recommend that, while the netproceeds attributable to Chief Commissioners' Provincesshould be retained wholly by the Centre, the otherreservations should go, and that the Provinces should getnot less than 60 per cent of the net proceeds of all incometax including the net proceeds of Corporation Tax, and taxeson federal emoluments. For the purpose of the division,income-tax will mean any levy made under the authority of the entry "Taxes on Income" in the Federal Legislative List.

39. We also consider that over and above its share inthe net proceeds retained by it normally, the Centre shouldbe empowered to levy a surcharge whenever conditions requiresuch a levy; obviously such occasions should be rare are notlast for unduly long periods.

40. Excise duties are ordinarily closely connected withcustoms duties and, barring liquor and drug excises, whichwe consider, should continue to remain Provincial areinherently not suited for provincial taxation. On the otherhand, they are only a species of consumption taxes of whichanother species namely, sales, turnover and purchase taxeshave been the subject of provincial taxation for some time.The Memoranda received by us from the Provincial Governmentsare almost unanimous in demanding some share under excises;and our problem is to find not only more resources for theunits but to make their revenues more balanced. If it waspossible to have excises on commodities not subject toCustoms duties (whether revenue or protective) or notcompeting, or capable of competing with, or of substitutionfor, commodities subject to customs duties, e.g., on rice orwheat or millets or on jute and jute goods consumed inIndia, we see no reason why such excises or a share thereofshould not be allotted to the units, apart from the generalpolitical objection to the division of heads, viz., thedivorce of benefit from responsibility. But such excises arenot likely to be levied. Again, it is obvious that Exciseduties on commodities subject to a protective tariff or evena high revenue tariff could not be conveniently shared. Inthe circumstances, the utmost that we can suggest by way of assistance in this respect to the Provincial Governments isto hand over to them a share of one of the important CentralExcises on a commodity not receiving tariff protection,viz., Tobacco. Incidentally, the effective administration ofthis excise requires the active co-operation of ProvincialGovernments, which would be better forthcoming if they had ashare in the tax. We are averse to giving the units a sharein too many Central Excises; for, such an arrangement wouldnot only magnify the political objection of benefit withoutresponsibility but lead to administrative inconvenience,since the rates could not be altered except by the consentof all the beneficiaries.

We accordingly recommend that 50 per cent of the netproceeds of the excise duty on tobacco should

not form partof the revenues of the Federation but should be distributedto the Provinces.

41. It will be seen from what has been said above thatwe are not in favour of the suggestion made in item VIII of the Terms of Reference, viz., that the Centre should beallocated only the excises on specified commodities, therest of the field of excise being left to the Provinces.

42. These duties cannot be administered satisfactorilyexcept by or in the closest touch with the income-tax staff;and in any case, if the Centre is to part with a substantialamount of taxes on income and also a part of certain Centralexcises, it is appropriate that it should get a share of theestate and succession duties. This will also give to theFederal Government a direct interest in the duty. Subject towhat we have said in paragraph 49 about taxes onagricultural property, we recommend that not more than 40per cent of the net proceeds of such duties should beretained by the Centre.

43. We recommend the continuance of the status quo,i.e., the legislation in respect of the duties on thespecified documents should be Central but Provinces willcollect and retain the duties.

44. These taxes are not suitable except for purelylocal purposes, i.e., for the benefit of municipalities,pilgrim funds, etc., but they can be conveniently levied andcollected only by the Centre. The existing provisions maystand.

Grants-in-Aid and Subventions

45. Item II of our terms of reference refers to Grants-in-aid.

Assam and Orissa now get fixed subventions of Rs. 30and Rs. 40 lakhs per annum, respectively. Therecommendations that we have made for the increase in theProvincial share of income-tax and the transfer of a sharein the excise on tobacco will increase their revenuessubstantially like those of other Provinces. Even so,however, we have little doubt that these two Provinces willstill require fixed subventions on higher scales than atpresent.

The position of East Punjab is peculiar. Everythingthere is unsettled, and it will take some time for things tosettle down. It is clear, however, that this Province willrequire a substantial annual subvention for some time tocome.

The position of West Bengal is uncertain, and it is notclear how her finances will shape as a result of thepartition. The liability that she will have to take over asa result of the partition is not yet known. All told,however, she will perhaps need some temporary assistance.

46. For lack of time and data, we have not been able toassess the subventions required by these four Provinces. We,therefore, recommend that the Central Government shouldimmediately take up the question so that the amountsrequired by each of these Provinces may be determined intime. The amounts should be subject to periodical review bythe Finance Commission to which we refer later.

47. We have suggested elsewhere that till the FinanceCommission has been able to recommend a better basis ofdistribution, a part of the divisible pool of income-taxshould be used in order to mitigate hardship in individualcases. The provision also contains an element of grants-in-aid.

48. It is clear that during the developmental stages of the country it will be necessary for the Centre to makespecific purpose grants to the Provinces from time to time.The provisions of clause 203 of the Draft Constitution seemto be adequate for the purpose. We have considered thequestion whether, as in Australia, grants should be made inorder to equalise, or at any rate to reduce the disparitybetween the levels of services and of severity of taxationin the different provinces. There is undoubtedly somethingattractive in seeking to bring up the backward units atleast to `average' standards, both in effort (severity oftaxation) and in performance (standards of services). InAustralia, the maximum difference between the levels is saidto be of the order of 20 per cent and the number of unitStates is small. In India, on the other hand, as for examplein the U.S.A., the difference in the levels is very wide andthe number of units larger

when acceding States come intothe picture. In such a background `averages' would be meremathematical concepts totally unrelated to actual facts. Onthe other hand, even in a Federation of autonomous units,there is a great deal to be said for helping the lessprosperous units to come up to the level of the moreprosperous ones. As in all such matters we must take arealistic decision with reference to the conditions in ourcountry. While we do not recommend the adoption in thiscountry of the Australian system, we have no doubt that theCentre, when distributing specific purpose grants underclause 203 of the Draft Constitution, will bear in mind thevarying circumstances in the different Provinces.

48-A. Section 199 of the Draft Constitution providesfor special assistance to Assam in respect of expenditurefor promoting the welfare of the scheduled tribes in theProvince. We agree with this provision. It has beenrepresented to us on behalf of Orissa that a similarprovision should be made for assisting her to develop thebackward areas of the Province. In the absence of any data,we have been unable to assess the measure of assistance, ifany, required by this Province, and we content ourselveswith expressing the view that if the Central Government,after a due examination of the question in all its aspects,decide the special assistance is necessary it should beprovided on adequate scale.

Taxes on Agricultural Income and Property

49. It is obvious that the taxation of agriculturalincome by the Provinces, while all other income is taxed bythe Centre, stands in the way of a theoretically soundsystem of income-tax in the country. We should, therefore,have liked to take this opportunity to do away with thissegregation. In view of the ease with which the origin of agricultural income can be traced, it could be arranged thatthe tax from such income, even though levied and collectedby the Centre as part of an integrated system of income-taxes, should be handed back to the Provinces; and it couldbe further arranged that till such time as the Centre infact levied a tax on agricultural income, the Provincesalready levying this tax might continue to levy it withoutrestriction and with full power to vary the rates of tax.The interests of Provinces could thus be fully protected,and there could, therefore, be no financial objections fromthem. On the other hand, the present arrangement has thepolitical merit of keeping together in one place bothbenefit and responsibility, a rather important point, seeingthat the Provinces will have full control over but fewimportant heads of revenue. A few provinces have, in fact,levied the tax and are administering it for some time.Perhaps also, the Provinces can administer this particulartax with greater `facility than the Centre. For the present,therefore, we have decided to continue the status quo, but,in view of the importance of the matter, would recommendthat the Provinces should be consulted at once and if amajority, including of course those now levying the tax,agree, tax on agricultural income may be omitted from theProvincial List of subjects, consequential changes beingmade elsewhere in the Constitution. Our foregoing remarksapply mutatis mutandis to Succession and Estate Duties onagricultural property also.

Division of proceeds of Revenue between Provinces

50. Income-tax - As regards the basis of distributingbetween Provinces the share of proceeds from taxes onincome, we are of the opinion that no single basis wouldlead to equitable results. Origin or locus of income is nodoubt relevant, but in the complex industrial and commercialstructure of modern times, where a single point of controloften regulates a vast net-work of transactions, where theraw materials come from one place, are processed in another,manufactured in a third, marketed wholesale in a fourth andultimately sold in retail over a large area, contracts aremade at places different from where they are performed,money is paid in at one place and goods delivered at anotherand more than one of these stages relate to the same

tax-payer the assignment of a share of profits to each stage canonly be empirical or arbitrary.

51. Again, the residence of the tax-payer is animportant factor, but apart from the artificial legaldefinition of residence for income-tax purposes; thepredominance of joint stock enterprise in business, thedispersion of the shareholders of companies all over thecountry and even outside, the possibility (emerging from theartificial definition) of simultaneous residence in morethan one area, the non-assessment (due to various reasons)of a large number of shareholders, and the absence of authoritative, i.e., tested, information in the income-taxrecords as to the province of a residence of a resident ofIndia (for, today, it is immaterial to the Income-taxDepartment in which particular Province on assessee isresident), all these together make this criterion ofresidence a difficult factor to apply in practice indistributing the proceeds of the tax. Even if thestatistical difficulties were got over, residence could bechanged at the will of the tax-payer.

52. Another possible criterion is the place ofcollection. This place is usually the principal place ofbusiness of the tax-payer, or his residence, if he is notcarrying on a business or profession. The objection to thisfactor is that it is unfair to the areas of origin and salewhich it completely ignores, while it gives far too muchweight to the place of control of a business, which isusually, though not necessarily, the place of collection.Moreover, even more than in the case of residence, the placeof collection can be easily altered at the will of the tax-payer.

53. Another possible basis is that of needs, i.e., theshares would be regulated somewhat like grants-in-aid, andrather than go into elaborate enquiries for this purpose,the population of a Province could be taken as a roughmeasure of its needs. The objection to this basis is that a`share' is something to which a Province is entitled becauseits citizens or things have in some measure contributed tothe fund, while a grant is something given to it withoutregard to its contribution to the Centre or to any commonpool.

54. We have said enough to show the difficulties of theproblem, but the difficulties have somehow to be faced andmet, unless we keep the whole of the taxes on income asCentral and permit Provinces simultaneously to levy aProvincial income-tax on the basis of origin. In our opinionthe latter course is not feasible in the circumstances ofthis country even if justifiable in theory; and pendingenquiry by the Finance Commission the setting up of which wesuggest later, we have no choice except somehow to make thedistribution on as equitable a basis as can be devised inthe circumstances.

55. We propose to proceed on the basis of collection aswell as population and also to make some provision foradjustment on the basis of need. We recommend that theProvincial share, i.e., 60 per cent. of the net proceeds bedistributed among the Provinces, as follows: -

20 per cent. on the basis of population.

35 per cent. on the basis of collection.

5 per cent. in the manner indicated in paragraph 56. - - - - -60 - - - - -

For the distribution of the first two blocks,population figures of the previous census and collectionfigures as certified by the Auditor-General should beaccepted as authoritative.

56. The third block of 5 per cent. should be utilisedby the apportioning authority as a balancing factor in orderto mitigate any hardship that may arise in the case ofparticular Provinces as a result of the application of theother two criteria; in distributing this block it would beopen to the authority to take into account all relevantfactors.

Excise duty on Tobacco

57. In our view, the most equitable method ofdistributing this duty is on the basis of estimatedconsumption. We have no doubt that the Government will takesteps to obtain necessary statistical information if it isnot already available.

Estate and Succession Taxes

58. These taxes have not so far been levied. One of thehurdles to be

crossed before they can be levied is thedetermination of the manner of distribution of the netproceeds among Provinces. Until the taxes are actuallylevied and collected for some time, no data about theirincidence will be available. Hence, the levy will have tostart with some a priori basis of apportionment amongProvinces. We accordingly recommend that until the FinanceCommission is in a position to evolve a better method on thebasicof data available to it, the net proceeds should bedistributed among the Provinces as follows: -

The net proceeds attributable to real property - On thebasis of the location of the property.

Of the balance -

75 per cent on the basis of the residence of thedeceased;

25 per cent on the basis of the population of theProvince.

The administration and distribution of these taxeswould, in the ordinary course, fall on the Central Board ofRevenue, but it would be necessary to empower an appropriateauthority to adjudicate in the case of disputes betweenProvinces as to the residence of individuals.

Effect of the proposals

59. The net effect of all our recommendations togetheris that, on the present basis of revenue, the Centre willhave to transfer to the Provinces a sum of the order of Rs.30 crores annually. It will recover a part of this loss bythe imposition of the Estate and Succession Duties, of thenet proceeds of which it will retain 40 per cent. We believethat it will not be beyond the capacity of the Centre topart with this amount annually during the next five years,though it must cause some strain, while at the same time thetransfer will enable the Provinces to start their programmeof essential social services and economic development.

60. In our recommendations regarding the distributionof proceeds of taxes among the Provinces, we have not onlyproceeded on more than one basis, but have provided for anelement of flexibility in order to mitigate hardship. Wehave also provided for a periodical review so that themethod of apportionment can be adapted to changingconditions from time to time on the basis of experience. Wehave further provided for grants-in-aid both to the weakerProvinces and to Provinces in difficulty.

61. We have also tried to make the whole arrangement asautomatic and free from interference as possible. The basicfeatures of the scheme will be embodied in the Constitutionitself, while periodic changes will be made by the Presidenton the recommendation of the Finance Commission, which wehope will command the confidence of all. As frequent changesare undesirable, we have recommended a five-yearly review,though in special circumstances the Finance Commission mayembark on a review at a shorter interval. The Provinces willnow be sure of their position and can go ahead with theirplans.

62. It is needless for us to add that to the extentthat the Centre transfers its resources to the Provinces inthe shape of new or increased shares in revenue, its abilityto give grants to the Provinces for specific or otherpurposes must be correspondingly reduced.

63. We may not have been able in our proposals tosatisfy everybody or to provide for every contingency thatmay possibly arise in the future, but we have tried to dothe best possible under the circumstances.

Finance Commission

64. For reasons already stated, our recommendation asto the initial basis of apportionment among Provinces is notintended to be permanent. Conditions may change. The workingof the scheme for some time will in itself produce some datathat would indicate the nature and direction of the changesrequired. It is necessary, therefore, to have a periodicalreview of the whole position by a neutral expert authority.

65. We recommend for this purpose, among others, theappointment of a high level Tribunal of five membersincluding a Chairman who has been, or is, holding highjudicial office, not lower than that of a Judge of a HighCourt. This Tribunal may be called the Finance Commission.There may not ordinarily be enough work for the Commissionto keep it busy continuously, and the

members need not,therefore, devote their whole time to the work. The membersshould be appointed by the President in his discretion ifonly because a Commission of this kind would have frequentlyoccasion to deal with points of conflict between the Centreand the Units. While we would not lay down any conditions inthe Statute as to how these members should be selected, werecommend that two should be selected from a panel ofnominees of Units Governments and two others from a panel ofnominees of Units Governments and two others from a panel ofnominees of the Central Government, the Chairman beingselected by the President himself. One at least of the fiveshould possess close knowledge of the finances and accountsof Governments, while another at least should have a wideand authoritative knowledge of economics, It would be anadvantage if one or more were public men with videexperience. it would be further advantage if a memberpossessed more than one qualification, and steps should betaken to secure the services of such individuals. Theappointments might be made for 5 years and be renewable foranother five years.

66. Between now and the setting up of the FinanceCommission, we recommend that the Central Government shouldtake steps in consultation with the Provinces, to collect,compile and maintain statistical information on certainbasic matters such as the value, volume and distribution ofproduction, the distribution of income, the incidence oftaxes, both Central and Provincial, the consumption ofimportant commodities, particularly those that are taxed orlikely to be taxed, etc. The Finance Commission, when setup, would then have some basic information to go upon, andwould no doubt call for such further information as it mayneed. It would also, to the extent necessary, arrange forcontinuous examination and research in respect of allimportant matters.

67. The Finance Commission should be entrusted with thefollowing functions: -

(a) To allocate between the Provinces, the respective shares of the proceeds of taxes that have to be divided between them;

(b) To consider applications for grant-in-aid from Provinces and report thereon;

(c) To consider and report on any other matter referred to it by the President.

68. While these categories would exhaust the duties of the Commission, it should be open to the Commission to makeany recommendations it may think expedient in the course of the discharge of these duties. It may, for example, suggesta variation in the heads of revenue assigned to theProvinces, i.e., the transfer of new heads or the withdrawalof existing heads, or increases in the shares of existingheads or a reduction in these shares. In making all suchrecommendations, the Commission will take into account allrelevant matters, including the state of finances of theCentre. Its recommendations, in so far as they do notinvolve any change in the Constitution, would, when acceptedby the President, be given effect to by him by order, whilerecommendations involving a change in the Constitution, ifsimilarly accepted by him, would be dealt with like anyother proposed amendment to the Constitution.

69. The Commission's first function would be of thenature of an arbitration, and therefore, the Commission'sdecisions will be final. As regardsone second function, we have no doubt that therecommendation of the Commission in respect of grants-in-aidwould be given the utmost weight by the President and notordinarily departed from by him.

70. The basis for the allocation of revenues referredto in item (a) should ordinarily be settled by theCommission at intervals of five years, but it should be opento the Commission to shorten the interval if it feelssatisfied in special circumstances that such shortening iscalled for.

71. We would further recommend, in order to save time,that the Finance Commission may be set up in advance of thecoming into effect of the Constitution, and its statusregularised after the Constitution comes into effect.

Residuary Powers of Taxation

72. It appears that under the new

Constitution,residuary powers will be vested in the Centre, so far as theProvinces are concerned, while the corresponding residuarypowers in respect of the States will be vested in the Statesthemselves. The question has therefore been raised whether,as a consequence, as many specific taxes as possible shouldnot be entered in the Provincial List of subjects. We cannotthink of any important new tax that can be levied by theProvinces, which will not fall under one or the other of theexisting categories included in the Provincial List. Wethink that the chance of any practical difficulty arisingout of the proposed constitutional position is remote, and,in any case, it seems to us that if a tax is levied by theCentre under its residuary powers, there will be nothing toprevent the proceeds of the whole or a part of this taxbeing distributed for the benefit of the Provinces only. Asa matter of abundant caution, however, it may be laid downin the Constitution that if any tax is levied by the Centrein future under its residuary powers, and to the extent thatthe States do not agree to accede to the Centre in respectof the corresponding subject the whole or a part of theproceeds of the tax shall be distributed between theProvinces and the acceding States only.

This disposes of Item IX of our Terms of Reference.

Exemption of Provincial Governments from Taxation

73. Section 155 of the Government of India Act providesthat profits from trading by a Provincial Government wouldbe taxable only if the trade was carried on outside theProvince. The exemption from Central taxation of trade byProvincial Governments carried on within the provinciallimits did not matter much in the past; for the Governmentshad few trading operations. With the present tendencytowards nationalisation (e.g., many provinces have alreadytaken up quite seriously the nationalisation of roadtransport). the Centre should have some power to levy eitherincome-tax or a contribution in lieu of income-tax inrespect of these trading activities. Disputes as to suchcontributions should, we consider, be examined andadjudicated upon by the Finance Commission to which we havealready referred. We feel that if nationalisation ofindustries or trades takes place rapidly, the whole questionwould have to be reviewed de novo, for the entire structureof the tax system of the country would be completelychanged.

74. In the meantime we make the followingrecommendations: -

(a) The existing practice should continue in respect of trading operations of the Central Government, i.e., no income-tax should be levied on the profits. It should be open to the Centre, however, to levy a contribution, as in the case of Railways, for its sole benefit from such operations. If the trading is carried on by a separate juristic person, tax will be levied even if the Government is the dominant shareholder.

(b) Tax should be levied on the trading operations of Units (as also of local bodies), whether carried on within or without their jurisdiction; and the tax or the contribution in lieu thereof should be treated as ordinary income-tax revenue for the purpose of the divisible pool. We presume that if there are no profits, there will be no contribution; but if this presumption is wrong, we suggest that the contribution should be treated as part of the divisible pool of income-tax.

(c) We recommend that quasi-trading operations incidental to the ordinary functions of Government such as the sale of timber by the forest department or of jail products by the jail department should not be treated as trading operations for this purpose.

Emergency Provisions

75. The needs of the Centre in times of emergency, suchas war or large scale internal disorder, cannot be providedfor through the detailed allocation of heads of revenue orof shares therein. It is obviously not possible to legislatehow emergencies should be met. We would suggest that thereshould be a special provision in the Constitutionauthorising the President in an emergency to suspend or varythe financial provisions in such manner as he may

think bestin the circumstances. For example, if there is a war and anExcess Profits Tax is levied, it might be necessary for theCentre to retain the whole of this tax for itself.

Procedure in Financial Matters

76. Item X of our terms of reference is as follows: -

"Is it necessary to make any modifications in theexisting provisions as regards procedure in financialmatters contained in Sections 33 to 37 and 78 to 83 of theGovernment of India Act, 1935?"

77. The present financial procedure in the federalsphere is laid down in sections 33-37 of the Government ofIndia Act, 1935. The corresponding clauses in the Draft Constitution as prepared by the Secretariat of theConstituent Assembly are 74, 75 and 77-81. We have tworecommendations to make: -

(1) When a money bill is sent from the Lower House to the Upper, a certificate of the Speaker of the Lower House saying that it is a money bill should be attached to, or endorsed on, the bill and a provision to that effect should be made in the Constitution on the lines of the corresponding provision in the Parliament Act, 1911. This will prevent controversies about the matter outside the Lower House.

(2) After clause 80, a provision may be made making it necessary for Government to approach the Legislature for regularising any excess expenditure that might be discovered in audit after the close of the year. This is, in fact, done even now, but there is no statutory obligation to do so.

Subject to these two recommendations, we approve of theprovisions in the Draft Constitution.

78. Financial procedure in the Provincial field isgoverned by sections 78-82 of the Government of India Act.1935. The corresponding provisions in the Draft Constitutionoccur in clauses 149-153. We recommend -

(1) that in a Province with a bicameral Legislature, if any, the powers of the Upper House over money bills should be exactly the same as at the federal level;

(2) that the new provision, in respect of a vote on excess grants, recommended by us at the federal level should be repeated at the provincial level also.

79. It is usual in written democratic constitutions toprovide that no money can be drawn from the treasury excepton the authority of the Legislature granted by an act of appropriation. In this country, the practice has been toauthorise expenditure by resolutions of Government after thedemands have been voted, and not by law. As the existingpractice has been working well in this country,appropriation by law does not appear to be necessary.


80. Though the question has not been specificallyreferred to us, we consider that the status and powers of the Auditor-General are so closely connected with financialprocedure that we have gone into this matter also. Theprovisions in respect of the Auditor-General of theFederation are contained in clauses 106-109 of the Draft Constitution, and those in regard to the Auditor-General of the Provinces, in clauses 174-175. In substance, all theseclauses repeat the existing provisions in the Government ofIndia Act. We consider the provisions to be adequate for thepurpose of securing the independence of the Auditor-General.We notice that the Auditor-General of India is to performthe functions of the Auditor-General in respect of theProvincial Governments also for an initial period of threeyears, and thereafter, until a particular ProvincialGovernment chooses to appoint its own Auditor-General. Wefavour the continuance of a single Auditor-General for theGovernment of India as well as for the ProvincialGovernments, and it is possible that the ProvincialGovernments will also prefer that course, and will choosenot to use their power of appointing separate Auditor-General for the Government of India as well as for theProvincial Governments, and it is possible that theProvincial Governments will also prefer that course, andwill choose not to use their power of appointing separateAuditor-General of their own. The Draft Constitution,however, gives them the option to appoint Auditors-Generalif they think fit so

to do. We are not sure whether it ispossible altogether to do away with this option, much as weshould like to do so; but if the option remains, werecommend that the provisions of sub-clause 3 of clause 174should be amended so as to make the Auditor-General of aProvince eligible for appointment as Auditor-General of another Province also.

Borrowing Powers

81. This question is covered by Item I of our Terms ofReference.

The present position is that the Provinces have thefreedom to borrow in the open market in India except whenthey are indebted to the Centre.

The most outstanding advantage of the freedom ofborrowing is the sense of financial responsibility itcreates; for, there is no more accurate, sensitive anddependable meter of the credit of a borrowing Governmentthan the reaction of the securities market. We do nottherefore wish to withdraw this freedom. Nevertheless, it isnecessary to have some machinery which would ensure thatborrowing Governments do not, by their competition, upsetthe capital market. This machinery is now provided throughthe Reserve Bank which advises all the Governments, but inview of the ambitious programmes of development both by theCentre and by the Units, it may become necessary to set upsome kind of expert machinery, both competent and definitelyempowered, to fix the order of priority of the borrowings of the different Governments. In some countries, this co-ordination is effected either by a Ministerial Conference orby a Loans Council. Such machinery should not affect theresponsibility of a Government for its borrowing policy, andshould help only in the timing of the loan and avoidance ofunnecessary competition. The co-ordination by the ReserveBank has worked well in practice and so long as it workswell we do not recommend any change. We assume that therewill be no distinction between federating States and theProvinces in this respect.

82. We are of the opinion that it should not be open toa Provincial Government or to a Government of a State to goin for a foreign loan except with the consent of the FederalGovernment and except under such conditions, if any, as theFederal Government may think fit to impose at the time ofgranting the consent. We notice, however, that there is anentry, viz., "18. Foreign Loans" in the Federal LegislativeList in the Draft Constitution. We are not sure whether, theinsertion of this entry in the Federal Legislative List isenough to prevent the Government of a Unit from going in fora foreign loan. We, therefore, recommend that the point beexamined, and if the provision is not found to be adequate,a specific provision should be made in clause 210 of theDraft Constitution making it necessary for the Government of a Unit to obtain the consent of the Federal Governmentbefore going in for a foreign loan.

Problem of Indian States

83. The points at issue are contained in items III, IV,V, VI and XI of our terms of reference.

This part of our work is the most difficult partythereof, and the difficulty arises as much from the lack ofstatistical data as from the complications of the problemitself; for, not only do conditions differ widely betweenthe Provinces as a whole and the States as a whole, but fromState to State, so that it is difficult to apply a commonyard-stick.

84. The Union Powers Committee of the ConstituentAssembly in Para. 2 (d) of their report, dated 17th April,1947, has expressed its view on this subject in thefollowing terms: - "We realise that, in the matter ofindustrial development, the States are in varying degrees of advancement and conditions in British India and the Statesare in many respects dissimilar. Some of the above taxes arenow regulated by agreements between the Government of Indiaand the States. We, therefore, think that it may not bepossible to impose a uniform standard of taxation throughoutthe Units all at once. We recommend that uniformity oftaxation throughout the Units may, for an agreed period ofyears after the establishment of the Union not exceeding 15,be kept in abeyance and the incidences, levy,

realisationand apportionment of the above taxes in the State Unitsshall be subjected to agreements between them and the UnionGovernment. Provision should accordingly be made in theConstitution for implementing the above recommendation." Weentirely agree with these observations.